IBM Takes Over IT Operations as Circuit City Cuts Costs

Published: April 2, 2007

by Timothy Prickett Morgan

Circuit City, the second largest distributor of electronics in the United States, has announced a cost-cutting plan that will see the company fire some 3,400 employees--about 8 percent of its workforce--and outsource its IT operations to IBM. This story doesn't have a huge OS/400 and i5/OS angle to it, unless you consider that Circuit City is very large user of AS/400, iSeries, and System i5 servers.

Like other large enterprises, Circuit City keeps the exact nature of its systems a secret. But we know from past stories that we did here at IT Jungle that as of the summer of 2005, the company has multiple large iSeries platforms back-ending its point of sale terminals as well as running its merchandizing, accounting, and other systems. The company also used to run a custom hack of the OpenBSD Unix variant on its point of sale terminals, and in 2004 was one of the first big players to make the move to Linux-based POS gear. In September 2005, Circuit City was bragging in a case study on the IBM site that unlike Best Buy, which has outsourced IT operations, it was hiring Big Blue to help it undergo an internal transformation of IT operations to improve efficiencies. The move to Linux POS machines was part of that transformation. In January 2004, Circuit City had 600 stores and 750 IT personnel; after engaging IBM for the IT transformation in August 2004, the retailer cut back to 475 people. This was apparently not enough.

Last week, Circuit City announced a $775 million, seven-year deal that will see IBM manage the retailers data centers, store support systems, e-commerce systems on the Web, desktop support, network operations, and IT security. IBM will provide help desk support for the more than 43,000 employees and 600-plus Circuit City stores in the United States. By letting IBM handle its IT operations, the retailer believes it can shave its IT expenses by about 16 percent over the seven-year term. So, on average, Circuit City must have been spending about $128 million a year on IT. That doesn't seem like a lot for a company that did $11.6 billion in sales in its fiscal 2006, but Circuit City has been pinched by dropping prices and wicked competition in the electronics market and, as a public company, it has to do something to get back to being profitable again.

Under the deal, 50 of the 130 IT employees in the corporate IT department will be given jobs at Big Blue, with the others staying on during the transition. The irony, of course, is that the same IBM that failed in the retail PC business that initially made it a household name back in the 1980s and which has subsequently made Hewlett-Packard and Dell the names that consumers know, is now talking about its 50 years of consulting prowess in the retail sector and how that will help Circuit City transform itself. The bigger irony is that whatever IBM learns from improving Circuit City will end up improving its competition. IBM will sell bullets to both sides--quite happily.

Luckily for Circuit City, its main rival, Best Buy, outsourced its IT operations to Accenture in April 2004, cutting its IT staff from 820 to 40 in one fell swoop, with about 650 moving over to Accenture. So IBM won't be sharing whatever it learns with Best Buy--at least not until Best Buy moves to IBM as an outsourcing provider.

Heaven only knows what happens to the iSeries and System i5 platform at Circuit City.

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